UNITED
STATES

SECURITIES
AND EXCHANGE COMMISSION

Washington,
D.C. 20549



FORM
10-QSB



[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF
THE SECURITIES EXCHANGE ACT OF 1934



For
the quarterly period ended March 31, 2005



[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR

15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934



Commission
file number 000-30009



PETROL
OIL AND GAS, INC.

(Exact
name of small business issuer as specified in its charter)



|Nevada                                                               | 90-0066187                                
|-------------------------------------------------------------------- | ------------------------------------------
|(State
      or other jurisdiction of incorporation or organization) | (I.R.S.
      Employer Identification No.)



3161
E. Warm Springs Road

Suite
300

Las
Vegas, Nevada 89120

(Address
of principal executive offices)



(702)
454-7318

(Issuer's
telephone number)



Check
mark whether the issuer (1) filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the last 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.



Yes
X    No ____



The
number of shares of Common Stock, $0.001 par value, outstanding on March 31,
2005, was 24,966,778 shares.



Transitional
Small Business Disclosure Format (check one):



Yes
___   No X





---



PART
I -- FINANCIAL INFORMATION

Item 1.
Financial Statements.



Petrol
Oil and Gas, Inc.

Condensed
Balance Sheet

Unaudited



|                                                                                                 | March
      31, 2005               
|------------------------------------------------------------------------------------------------ | -----------------------------------
|Assets                                                                                           |                                    
|Current
      assets:                                                                            |                                    
|Cash                                                                                             | $                  
      1,344,168
|Cash, restricted                                                                                 | 857,767                            
|Accounts receivable                                                                              | 793,485                            
|Prepaid expenses and other current assets                                                        | 36,026                             
|Investment                                                                                       | 16,789                             
|Total current assets                                                                             | 3,048,235                          
|                                                                                                 |                                    
|Fixed
      assets, net                                                                          | 1,648,358                          
|                                                                                                 |                                    
|Other
      assets:                                                                              |                                    
|Oil and gas properties using full cost accounting:                                               |                                    
|Properties not subject to amortization                                                           | 1,683,064                          
|Properties subject to amortization                                                               | 11,233,162                         
|Capitalized loan costs, net                                                                      | 636,500                            
|Total other assets                                                                               | 13,552,726                         
|                                                                                                 | $                 
      18,249,319
|                                                                                                 |                                    
|Liabilities
      and stockholders' equity                                                       |                                    
|Current
      liabilities:                                                                       |                                    
|Accounts payable                                                                                 | $
      310,221                    
|Accrued liabilities                                                                              | 352,814                            
|Short-term derivative liability                                                                  | 275,400                            
|Asset retirement obligation                                                                      | 661,617                            
|Accrued liability - related parties                                                              | 619,697                            
|Current portion of long term debt                                                                | 1,325,544                          
|Total current liabilities                                                                        | 3,545,293                          
|                                                                                                 |                                    
|Long-term
      debt, less current portion                                                       | 5,048,980                          
|                                                                                                 |                                    
|Contingencies
      and commitments                                                              |                                    
|                                                                                                 |                                    
|Stockholders'
      equity:                                                                      |                                    
|Preferred stock, $0.001 par, authorized 10,000,000 shares; no shares
      issued                | -                                  
|Common stock, $0.001 par, authorized 100,000,000 shares; 24,966,778 issued
      and outstanding | 24,967                             
|Stock bought or for services not issued                                                          | 116                                
|Unamortized cost of stock issued for services                                                    | (50)                               
|Additional paid-in capital                                                                       | 18,544,507                         
|Other comprehensive (loss)                                                                       | (275,400)                          
|Accumulated (deficit)                                                                            | (8,639,094)                        
|Total stockholders' equity                                                                       | 9,655,046                          
|                                                                                                 | $                 
      18,249,319





See
notes to condensed financial statements.





---



Petrol
Oil and Gas, Inc.

Condensed
Statement of Operations

Unaudited



|                                           | Quarter
      Ended March 31,     
|------------------------------------------ | ----------------------------------
|                                           | 2005                              
|Revenue:                                   | $             
      1,190,611    
|                                           |                                   
|Expenses:                                  |                                   
|Direct operating costs                     | 418,001                           
|Professional and consulting fees           | 1,412,580                         
|General and administrative                 | 300,118                           
|Depreciation, depletion and amortization   | 349,454                           
|Acquisition costs                          | -                                 
|Total expenses                             | 2,480,153                         
|Loss
      from operations                 | (1,289,542)                       
|                                           |                                   
|Other
      income (expense):              |                                   
|Interest and other income                  | 13,653                            
|Interest expense                           | (395,815)                         
|Other
      income (expense)               | (382,162)                         
|Loss
      before income tax               | (1,671,704)                       
|Provision
      for income tax             | -                                 
|Net
      loss                             | $           
      (1,671,704)    
|                                           |                                   
|                                           |                                   
|Basic
      and diluted earnings per share | $                    
      (0.08)
|                                           |                                   
|Weighted
      shares outstanding          | 21,529,710                        
|                                           |                                   













See
notes to condensed financial statements.





---



Petrol
Oil and Gas, Inc.

Condensed
Statement of Cash Flows

(Unaudited)



|                                                                              | Quarter
      Ended March 31,              
|----------------------------------------------------------------------------- | -------------------------------------------
|                                                                              | 2005                                       
|Operating
      activities:                                                   |                                            
|Net loss                                                                      | $                
      (1,671,704)        
|Adjustments
      to reconcile net loss to cash used in operating activities- |                                            
|Depreciation, depletion and amortization                                      | 349,454                                    
|Accretion of warrants issued for long-term debt                               | 255,133                                    
|Stock and warrants issued for services and interest payments                  | 1,344,087                                  
|Stock issued in acquisition of CBM                                            | -                                          
|Change in assets and liabilities-                                             |                                            
|Accounts receivable                                                           | (480,503)                                  
|Prepaid expense and other current assets                                      | (24,500)                                   
|Investments                                                                   | (1,011)                                    
|Accounts payable                                                              | (151,932)                                  
|Accrued liabilities                                                           | 76,685                                     
|Accrued liability - related parties                                           | 349,697                                    
|Note payable - related party                                                  | -                                          
|Cash provided by (used in) operating activities                               | 45,406                                     
|                                                                              |                                            
|Investing
      activities:                                                   |                                            
|Equipment purchased                                                           | -                                          
|Additions to restricted cash                                                  | (5,421)                                    
|Additions to oil & gas properties not subject to amortization                 | (487,702)                                  
|Cash used in investing activities                                             | (493,123)                                  
|                                                                              |                                            
|Financing
      activities:                                                   |                                            
|Payments made on long-term debt                                               | (1,000)                                    
|Cash used in financing activities                                             | (1,000)                                    
|                                                                              |                                            
|Increase
      in cash                                                        | (448,717)                                  
|Beginning
      cash                                                          | 1,792,885                                  
|Ending
      cash                                                             | $                    
      1,344,168      
|                                                                              |                                            
|Supplemental
      cash flow information:                                     |                                            
|Interest paid                                                                 | $                              
      734  
|Income taxes paid                                                             | -                                          
|                                                                              |                                            
|Non
      cash financing activities:                                          |                                            
|Unamortized cost of stock issued for services                                 | $                                  
      -
|Stock for services not issued                                                 | -                                          
|Stock, warrants and options issued for services                               | 1,344,087                                  
|Stock issued and exercise of options for a note receivable                    | -                                          
|Asset retirement obligation                                                   | 206,500                                    
|                                                                              |                                            







See
notes to condensed financial statements.





---



Petrol
Oil and Gas, Inc.

Notes
To Condensed Financial Statements



Note
1 - Basis of Presentation



The
unaudited condensed financial statements have been prepared in accordance with
United States generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and reflect all adjustments
which, in the opinion of management, are necessary for a fair presentation. All
such adjustments are of a normal recurring nature. The results of operations for
the interim period are not necessarily indicative of the results to be expected
for a full year. Certain amounts in the prior year statements have been
reclassified to conform to the current year presentations. These statements
should be read in conjunction with the financial statements and footnotes
thereto included in the Form 10-KSB for the year ended December 31, 2004.



Note
2 - Stock Transactions and Consulting Agreements



On
January 11, 2005, the Company awarded Mr. David Polay 50,000 shares and Mr.
LoCascio 10,000 shares of its common stock for services. The value of the stock
was determined based on the closing value of its stock on the date the stock was
issued. The Company recorded $141,000 as professional fee expense.



On
January 11, 2005, the Company issued 60,000 shares of its common stock in lieu
of cash compensation to Russell A. Frierson for land and administrative support
rendered to the Company. The value of the stock was determined based on the
closing value of its stock on the date the stock was issued. The Company
recorded $141,000 as professional fee expense.



On
January 11, 2005, the Company issued 100,000 shares of its restricted common
stock to Gary Bridwell. The Company had recorded the par value of the stock as
stock bought or for services not issued at December 31, 2004 so this reduced
that account by $100.



At
March 31, 2005, the Company had approximately 116,000 shares of its common stock
that is earned but not issued.



On
January 28, 2005, in exchange for delaying its monthly principal payment until
June, 2005 on the note due to Laurus the Company issued to Laurus 666,667
warrants at an exercise price of $2.50 and 333,333 warrants at an exercise price
of $3.00. The Company recorded as professional fee expense $549,000 which
represented the fair market value of the warrants based on the Black-Scholes
pricing model.



On
February 7, 2005, the Company entered into a Consulting Agreement with CEOcast,
Inc., wherein the Company agreed to issue 40,000 shares of its common stock to
CEOcast. The value of the stock was determined based on the closing value of the
stock on the date the stock was issued. The Company recorded $96,800 as
professional fee expense.







---

Petrol
Oil and Gas, Inc.

Notes
To Condensed Financial Statements



On
March 23, 2005, Laurus Master Fund, Ltd. converted $190,677.37 of accrued
interest due under the Convertible Term Note. Pursuant to the conversion rate of
$1.50 per share the Company issued 127,118 shares of its common stock to Laurus
on March 31, 2005.



On
March 16, 2005, the Company executed an agreement with CSC Group, wherein Steve
Cochennet, (an Advisory Board Member) President of CSC Group, agreed to provide
the Company with services to further its long-term strategy. The term of the
agreement began on January 1, 2005. The Company agreed to pay Mr. Cochennet
$5,000 per month plus grant 150,000 options to CSC Group at $2.04 per share for
a period of five years. Mr. Cochennet will also receive 3% of any debt facility
or mezzanine financing he puts in place prior to December 31, 2005. The value of
the warrants was $138,795 as calculated by using the Black-Scholes pricing
model. This was recorded as professional fee expense.



On
March 18, 2005, the Company executed an agreement with Robert Howell, (an
Advisory Board Member) wherein Mr. Howell agreed to provide the Company with
services on specified assignments as needed by the Company. The term of the
agreement is for three months and began on February 1, 2005. The Company agreed
to compensate Mr. Howell $10,000 for each month plus pay for all reasonable
business and travel expenses, and grant Mr. Howell 125,000 options to purchase
its common stock at a price equal to the average of the last 22 trading days
ending April 29, 2005. The options will be fully vested and will have five years
in which to exercise them. If Mr. Howell is involved in finding sources of debt
for the Company, he will work with Mr. Cochennet and be paid an additional fee
by Mr. Cochennet. The value of the warrants was $86,825 as calculated using the
Black-Scholes pricing model. This was recorded as professional fee expense.



A
summary of stock options and warrants is as follows:



|                           | Options   |       | Warrants   |      
|-------------------------- | --------- | ----- | ---------- | -----
|Outstanding
      12/31/04 | 1,700,000 | $1.24 | 17,761,666 | $1.49
|Granted                    | 275,000   | 2.06  | 1,000,000  | 2.67 
|Cancelled                  | --        | --    | --         | --   
|Exercised                  | --        | --    | --         | --   
|Outstanding
      3/31/05  | 1,975,000 | $1.35 | 18,761,666 | $1.55



Note
3 - Asset Retirement Obligation



The
Company's asset retirement obligations relate to the abandonment of oil and gas
wells. The amounts recognized are based on numerous estimates and assumptions,
including future retirement costs, inflation rates and credit adjusted risk-free
interest rates. The following shows the changes in asset retirement obligations
for the financial statements presented.



|                                                     | March
      31, 2005
|---------------------------------------------------- | --------------------
|Asset
      retirement obligation, beginning of year | $
      445,617     
|Liabilities
      incurred during the year           | 206,500             
|Liabilities
      settled during the year            | --                  
|Accretion
      of expense                           | 9,500               
|Asset
      retirement obligations, end of year      | $
      661,617     





---



Petrol
Oil and Gas, Inc.

Notes
To Condensed Financial Statements



Note 4
- Long-Term Debt



Long-term
debt consists of the following:



|                                                    | March
      31, 2005
|--------------------------------------------------- | --------------------
|Convertible
      Note payable - Laurus Master Fund | $
      8,000,000   
|Note
      payable - GMAC                           | 21,923              
|Total                                               | 8,021,923           
|                                                    |                     
|Less
      unamortized cost of warrants             | (1,647,399)         
|                                                    |                     
|                                                    | 6,374,524           
|Less
      current portion                          | (1,325,544)         
|Total long-term debt                                | $
      5,048,980   
|                                                    |                     

During
the quarter ended March 31, 2005 the accretion of the warrants that was included
in interest expense totaled $255,081.



Note
5 - Fixed Price Sales Contracts



The
Company entered into various contracts with Seminole Energy Services LLC to sell
60,000 mmbtu per month for the period of March 2005 to February 2006 at various
fixed prices with the overall average price of $5.99.



Note
6 - Subsequent Events



On
April 13, 2005, Laurus Master Fund, Ltd. converted $52,819.75 of accrued
interest due under the Convertible Term Note. Pursuant to the conversion rate of
$1.50 per share the Company issued 35,213 shares of its restricted common stock
to Laurus on April 19, 2005.



On
April 29, 2005, Laurus Master Fund, Ltd. converted $112,500 of principal into
75,000 shares under the Convertible Term Note. The Company issued the 75,000
shares of its restricted common stock to Laurus on May 5, 2005.



On
May 12, 2005, Laurus Master Fund, Ltd. converted $115,882.28 of principal and
$54,346.47 of accrued interest due under the Convertible Term Note. Pursuant to
the conversion rate of $1.50 per share the Company issued 113,486 shares of its
restricted common stock to Laurus on May 17, 2005.





---



FORWARD-LOOKING
STATEMENTS



This
document contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. All statements other than
statements of historical fact are "forward-looking statements" for
purposes of federal and state securities laws, including, but not limited to,
any projections of earnings, revenue or other financial items; any statements of
the plans, strategies and objections of management for future operations; any
statements concerning proposed new services or developments; any statements
regarding future economic conditions or performance; any statements or belief;
and any statements of assumptions underlying any of the foregoing.



Forward-looking
statements may include the words "may," "could,"
"estimate," "intend," "continue,"
"believe," "expect" or "anticipate" or other
similar words. These forward-looking statements present our estimates and
assumptions only as of the date of this report. Except for our ongoing
securities laws, we do not intend, and undertake no obligation, to update any
forward-looking statement.



Although
we believe that the expectations reflected in any of our forward-looking
statements are reasonable, actual results could differ materially from those
projected or assumed in any of our forward-looking statements. Our future
financial condition and results of operations, as well as any forward-looking
statements, are subject to change and inherent risks and uncertainties. The
factors impacting these risks and uncertainties include, but are not limited to:

- increased
competitive pressures from existing competitors and new entrants;
- increases
    in interest rates or our cost of borrowing or a default under any material
    debt agreements;
- deterioration
in general or regional economic conditions;
- adverse
state or federal legislation or regulation that increases the costs of
compliance, or adverse findings by a regulator with respect to existing
operations;
- loss
of customers or sales weakness;
- inability
to achieve future sales levels or other operating results;
- fluctuations
of oil and gas prices;
- the
unavailability of funds for capital expenditures; and
- operational
inefficiencies in distribution or other systems.

For
a detailed description of these and other factors that could cause actual
results to differ materially from those expressed in any forward-looking
statement, please see "Factors That May Affect Our Results of
Operation" in this document and in our Annual Report on Form 10-KSB for the
year ended December 31, 2004.





---



Item
2. Plan of Operation.



OVERVIEW
AND OUTLOOK



We
are an oil and gas exploration, development and production company. Our
properties are located in the Cherokee Basin along the Kansas and Missouri
border. Our corporate strategy is to continue building value in the Company
through the development and acquisition of gas and oil assets that exhibit
consistent, predictable, and long-lived production. Our current focus is Coal
Bed Methane reservoirs in the central U.S., which produce both Coal Bed Methane
("CBM") and conventional gas.



We
have consolidated a strong lease position in CBM that contains quality proven
gas reserves, some of which are adjacent to interstate pipeline systems which
would provide ready sales market for our produced gas. Our focus now turns to
developing and producing those leases so as to realize the value held in them.
With 169,000 gross leased acres the task of developing the properties with wells
on 160 acre spacing will involve in excess of 1,000 wells.



We
intend to continue seeking acquisition opportunities which compliment our
current production. We intend to fund our development activity primarily through
use of cash flow from operations and cash on hand, while seeking larger debt
funding opportunities sufficient enough to develop a greater portion of our
mineral leases.



Our
revenue, profitability and future growth rate depend substantially on factors
beyond our control, such as economic, political and regulatory developments and
competition from other sources of energy. Oil and natural gas prices
historically have been volatile and may fluctuate widely in the future.
Sustained periods of low prices for oil or natural gas could materially and
adversely affect our financial position, our results of operations, the
quantities of oil and natural gas reserves that we can economically produce and
our access to capital.



Results
of Operations



The
following overview provides a summary of key information concerning our
financial results for the first quarter of 2005 and 2004.



|                                               |  | First
      Quarter          |  |                                    
|---------------------------------------------- |  | ---------------------------- |  | -----------------------------------
|                                               |  | 2005                         |  | 2004                               
|                                               |  | Amount                       |  | Amount                             
|Revenue                                        |  | $           
      1,190,611 |  | $                          
      -
|                                               |  |                              |  |                                    
|Expenses:                                      |  |                              |  |                                    
|Direct
      operation costs                   |  | 418,001                      |  | -                                  
|General and administrative                     |  | 300,118                      |  | 168,532                            
|Professional and
      consulting fees         |  | 1,412,580                    |  | 552,311                            
|Depreciation, depletion
      and amortization |  | 349,454                      |  | 1,455                              
|Acquisition cost                               |  | -                            |  | 654,000                            
|Total expenses                                 |  | 2,062,152                    |  | 722,298                            
|                                               |  |                              |  |                                    
|Loss
      from operations                     |  | (1,289,542)                  |  | (1,376,298)                        
|Other
      income (expense):                  |  |                              |  |                                    
|Interest and other income                      |  | 13,653                       |  | 19,926                             
|Interest expense                               |  | (395,815)                    |  | (953)                              
|Net
      loss                                 |  | $         
      (1,671,704) |  | $         
      (1,357,325)       





---



First
Quarter of 2005 Compared to First Quarter in 2004



Revenue:
Total revenue for the first quarter of 2005 and 2004 was $1,190,611 and $-0-. 
Historically,
we have been in a development stage, acquiring various mineral leases and
implementing all necessary capital improvements in order to become efficient in
our production efforts. Our increase in revenue during the 1st quarter of 2005 is attributable to the acquisition of the Savage properties
during the 4th quarter of 2004 and an increase in the amount of oil
wells brought on line for production during the 1st quarter.



Expenses:



Direct
operating costs are the costs that are associated with getting the oil and
gas to the market for sales. These costs totaled $418,001 in 2005 and were $-0-
in 2004 as there was production in 2005 and in 2004.



General
and administrative expensesfor the first quarter of 2005 and 2004 were
$300,118 and $168,532, respectively, for an increase of $131,586. The increase
is attributable to the additional overhead incurred in connection with the
commencement of field operations.



Professional
and consulting fees were $1,412,580 and $552,311 for the first quarter of
2005 and 2004, for an increase of $860,269. The increase is a result of our
endeavors to obtain the necessary capital required to ultimately increase
revenue. Our efforts have led us to various individuals with which we have
entered into consulting agreements for services related to obtaining finance
commitments.



Depreciation,
depletion and amortization expense for the first quarter of 2005 and 2004
were $349,454 and $1,455. Historically, as a development stage company, we had
not placed in service depreciable assets nor had we begun production eliminating
the need for a depletion expense. The increase was a result of recently
completed acquisition obligations and commencement of production.



Acquisition
costs in 2004 was the non-allocable amounts associated with the purchase of
oil and gas assets.



Other
Income (Expense):



Interest
and other income for the first quarter of 2005 and 2004 was $13,653 and
$19,926, respectively, for a decrease of $6,273 which was the result of the
Laurus restricted account as a result of the Laurus financing.



Interest
Expense for the first quarter of 2005 and 2004 was $395,815 and $953,
respectively, for an increase of $394,862. During the fourth quarter of 2004, we
issued a long-term convertible note in the amount of $8,000,000 and the interest
and accretion of warrant cost is associated with the note.



Net
Loss: Our net loss for the first quarter of 2005 and 2004 was $1,671,704
and $1,357,325, respectively, for an increase loss in the amount of $314,379. Of
these losses, approximately $805,000 was attributable to costs directly
associated with our current financing arrangements as well as an increase
overhead due to increase field operations.



Operation
Plan



During
the next twelve months we plan to continue to focus our efforts on the sustained
development and production of CBM on our existing properties, pursuing strategic
acquisitions of producing properties and creating value by furthering our
business plan.





---



We
intend to fund portions of our field operations and development program from
revenues obtained from sales of our CBM gas and oil production, from outside
lenders, and from proceeds of anticipated exercise of warrants and options. In
addition, we may take on Joint Venture (JV) or Working Interest (WI) partners
that will contribute to the capital costs of drilling and completion and then
share in revenues derived from production. This economic strategy may allow us
to realize the value in our own financial assets toward the growth of our leased
acreage holdings, pursue the acquisition of strategic oil and gas producing
properties or companies and generally expand our existing operations.



Our
future financial results will depend primarily on: (i) the ability to continue
to produce gas and oil from existing wells; (ii) the ability to discover
commercial quantities of natural gas and oil; (iii) the market price for oil and
gas; and (iv) the ability to fully implement our exploration and development
program, which is dependent on the availability of capital resources. In order
to be successful in all or any of these respects, the prices of oil and gas
prevailing at the time of production must be at a level allowing for profitable
production, and we must be able to obtain additional funding to increase our
capital resources.



With
the acquisition of the Petrol-Neodesha and certain oil properties, we are
currently providing ongoing revenue and cash from these properties. As we expand
operational activities, we will weigh the pace of further drilling and
development against the availability of internal and external funding.



Liquidity
and Capital Resources



Financing.
On October 28, 2004, we entered into agreements with Laurus Master Fund, Ltd., a
Cayman Islands corporation. Under the terms of the Laurus Funds agreements we
issued a Secured Convertible Term Note (the "Note") in the aggregate
principal amount of $8.0 million. The Note is convertible into shares of our
common stock at a fixed conversion price of $1.50 per share. The Note has a
three-year term and bears an interest rate equivalent to the "prime
rate" published by the Wall Street Journal from time to time plus 3%,
subject to a floor of 7.5% per annum.



On
January 28, 2005, we amended the Laurus Funds Secured Convertible Term Note and
the Registration Rights Agreement. Laurus agreed to move six months of principal
payments (January through May of 2005) to be paid on the Maturity Date (October
28, 2007). Additionally, Laurus agreed to extend certain filing and
effectiveness dates under the registration rights agreement. In consideration
for the amendment, we issued an additional common stock purchase warrant to
Laurus to purchase up to 1,000,000 shares of our common stock at $2.50 per share
for the first 666,667 shares and $3.00 per share for the next 333,333 shares.
Further, we are required to file a registration statement covering the new
warrant on or before August 1, 2005.



In
the three months ended March 31, 2005, Laurus converted $190,677.37 worth of
accrued interest into 127,118 shares of restricted common stock. Subsequent to
March 31, 2005, Laurus converted $228,382.28 principle and $107,166.22 of
accrued interest into 223,699 shares of restricted common stock. The conversion
of accrued interest allowed us access to additional cash to use in our
operations.



Pursuant
to the terms of the Registration Rights Agreement between Laurus and us, we are
obligated to file a registration statement registering 10,666,666 shares of our
common stock issuable upon conversion of the Note and exercise of the Warrant.
We are required to file a registration statement on or before December 12, 2004
and must have the registration statement declared effective on or before March
31, 2005. On October 29, 2004, we filed a registration statement on Form SB-2
which included the Laurus shares. Because the registration statement has not
been declared effective within the timeframe described, we are obligated to pay
Laurus a fee equal to 2.0% of the aggregate original principal amount of the
Note for each 30 day period (pro rated for partial periods) that such
registration conditions are not satisfied. Pursuant to Amendment No. 1 to the
Registration Rights Agreement, we are obligated to file a registration statement
registering the 1,000,000 shares of our common stock issuable upon exercise of
the New Warrant. We are obligated to file a registration statement on any date
after January 28, 2005 upon which we file a registration statement with the
Securities and Exchange Commission relating to the resale of our common stock or
before August 1, 2005. Further, pursuant to the amendment agreement executed on
April 28, 2004, we have agreed to file semi-annual registration statements to
register shares of our common stock issued to Laurus for the conversion of
interest under the Note.





---



Cash
Flows. Since inception, we have financed cash flow requirements through debt
financing and the issuance of common stock for cash and services. As we expand
operational activities, we may continue to experience net negative cash flows
from operations, pending receipt of sales or development fees, and will be
required to obtain additional financing to fund operations through common stock
offerings and debt borrowings to the extent necessary to provide working
capital.



Satisfaction
of our cash obligations for the next 12 months.



A
critical component of our operating plan impacting our continued existence is to
efficiently manage the production from the Savage acquisition, our ability to
obtain additional capital through additional equity and/or debt financing, and
JV or WI partnerships will also be important to our expansion plans. In the
event we experience any significant problems assimilating acquired assets into
our operations or cannot obtain the necessary capital to pursue our strategic
plan, we may have to significantly curtail our operations. This would materially
impact our ability to continue operations.



We
believe that with revenues from operations combined with the funds remaining in
the Laurus restricted account, we are able to proceed with the next phase of our
operations which is large field scale development. However, we anticipate the
need for a significant amount of funds in order to fully develop our leased
acreage.



Over
the next twelve months we believe that existing capital combined with cash flow
from operations will be sufficient to sustain operations and planned expansion.



We
may incur operating losses over the next twelve months. Our lack of operating
history makes predictions of future operating results difficult to ascertain.
Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development and production, particularly companies in the oil and gas industry.
Such risks include, but are not limited to, an evolving and unpredictable
business model and the management of growth. To address these risks we must,
among other things, implement and successfully execute our business and
marketing strategy, continue to develop and upgrade technology and products,
respond to competitive developments, and attract, retain and motivate qualified
personnel. There can be no assurance that we will be successful in addressing
such risks, and the failure to do so can have a material adverse effect on our
business prospects, financial condition and results of operations.



Under
our current operating plan, we are required to make certain lease payments to
maintain our rights to develop and drill for oil and gas. These lease payments
are material obligations to us.



As
of March 31, 2005, we had assets of $18,249,319, and $8,594,273 in liabilities
(total current liabilities of $3,545,293); resulting in a stockholder's equity
of $9,655,046.





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Summary
of product and research and development that we will perform for the term of our
plan.



Field
Development



Our
original plan of operation for field development started with identifying the
most promising and cost-effective drill sites on our current leased acres,
drilling and testing wells to prove reserves, completing the more promising test
wells, extracting the gas, oil and other hydrocarbons that we find, and
delivering them to market. We believe that we have leased enough land to move
forward with our field development and are proceeding with the next phase of our
operations, which is large field scale development.



Our
Petrol-Neodesha project has spacing for at least another 50 wells to fully
develop this existing leased acreage. As part of our agreement with Laurus
Master Funds during the purchase of this property approximately $850,000 was set
aside to continue developing and improving Petrol-Neodesha. With those available
funds, Petrol expects to begin drilling new infill wells, during the second
quarter of 2005. In addition we are in the process of enhancing our gas
gathering system with the addition of a set of new booster pumps and larger
diameter trunk lines. Finally, we have instituted a well remediation program for
some older producing wells that is anticipated to also enhance production.



During
our two year exploration and development phase of our plan of operation for the
Coal Creek and Missouri projects, we drilled and tested a total of 23 CBM wells.
These drilling and testing efforts have provided our geologists and engineers
with data that support the quantitative determination concerning the gas content
and commercially produceable amounts of CBM or other types of natural gas.
Eighteen of these exploratory/test wells are contained within our Coal Creek
project in Coffey county, Kansas. Most are in proximity to an existing
interstate gas pipeline and one is already included in a recent gas sales
contract. The total drilling depth for our Kansas project wells is approximately
1,700 ft.



Our
Reserve Report dated December 31, 2004 indicates Petrol has Proven Undeveloped
gas reserves on its leases in the Coal Creek Project totaling 1.08 Billion cubic
feet and Probable Net reserves of approximately 1.01 Billion cubic feet. Various
alternatives for further development of the field and the gas gathering
infrastructure in this project are currently being evaluated



The
remaining five exploratory/test wells were drilled on our Missouri Project in
Cass County Missouri. Again most were located in close proximity to an
interstate gas pipeline system. Since the Cherokee basin dips to the west the
CBM formations in Missouri are considerably shallower than in Kansas, with total
depths being about 700 ft.



In
the field development stages of our plan, each new well will be drilled and
tested individually. The well, upon a favorable evaluation of its producing
capabilities, will be fully completed and connected to our local gas gathering
and water disposal pipelines.



When
we have identified a proposed drilling site, we as a licensed operator in the
State of Kansas and Missouri, will be engaged in all aspects of well site
operations. As the operator we will be responsible for permitting the well,
which will include obtaining permission from the Kansas Oil and Gas commission
or Missouri relative to spacing requirements and any other state and federal
environmental clearances required at the time that the permitting process
commences. Additionally, we will formulate and deliver to all interest owners an
operating agreement establishing each participant's rights and obligations in
that particular well based on the location of the well and the ownership. In
addition to the permitting process, we as the operator will be responsible for
hiring the driller, geologist and land men to make final decisions relative to
the zones to be targeted, confirming that we have good title to each leased
parcel covered by the spacing permit and to actually drill the well to the
target zones. We will be responsible for completing each successful well and
connecting it to the most appropriate portion of our gas gathering system.





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As
the operator we will be the caretaker of the well once production has commenced.
As the operator, we will be responsible for paying bills related to the well,
billing working interest owners for their proportionate expenses in drilling and
completing the well, and selling the production from the well. Once the
production has been sold, we anticipate that the purchaser thereof will carry
out its own research with respect to ownership of that production and will send
out a division order to confirm the nature and amount of each interest owned by
each interest owner. Once a division order has been established and confirmed by
the interest owners, the production purchaser will issue the checks to each
interest owner in accordance with its appropriate interest. From that point
forward, we as operator will be responsible for maintaining the well and the
wellhead site during the entire term of the production or until such time as we
have been replaced or the site appropriately abandoned.



All
aspects of this described development process are in fact similar if not
identical to those we employ in our Petrol-Neodesha project that currently
produces about 2.9 Million cubic feet of gas per day from 72 wells. In total
Petrol operates in excess of 500 wells, with 375 wells being oil or gas
producing and the remaining 125 wells being injection/flood wells or salt water
disposal wells.



We
amended our agreement with Mr. William Stoeckinger, a Certified Petroleum
Geologist, from Bartlesville, Oklahoma to extend the term of his agreement to
November 1, 2006. Mr. Stoeckinger provides geological services both in the
assessment process and in the development program. To date, Mr. Stoeckinger has
reported good gas shows in a number of the coal seams contained in the Cherokee
Group, the primary source of CBM production in the area.



Kansas
Geologic Society (KGS) joined us in our scientific effort designed to assess the
gas reserves from our CBM exploratory/test wells in eastern Kansas. KGS took
samples from coal beds found in our Coffey County wells. Their laboratory test
results yielded similar gas content values to those obtained by our geologist,
Mr. William Stoeckinger, that were derived from sampling of our other
exploratory/test wells. We view these independent gas content values quite
favorably since they indicate quantitative similarities to the CBM producing
coal beds found in other counties to the south. Woodson county being adjacent to
Coffey county.



Based
on our first series of exploratory/test wells we anticipate that each well in
our targeted area will cost approximately $30,000 to locate, drill and test, an
additional $105,000 to complete, plus an additional $1,000 per month per well to
pay for electricity, pulling and repairs, pumping and other miscellaneous
charges. In support of these operations we have working agreements with local
third parties to monitor and maintain our wells and perform drilling and
work-over activities.



Along
with the drilling and completion of our CBM production wells Petrol will
formulate, design and install a gas gathering and compression system to
transport the gas from wellhead to the high pressure interstate pipeline tap and
sales market. Our experience in Petrol-Neodesha will be brought to bear on these
new areas in Coal Creek or Missouri. We have identified several major interstate
distribution pipelines that operate within and pass through the counties in
which we have lease holdings. These include pipelines owned and operated by
Southern Star, CMS Energy, Enbridge and Kinder Morgan. We have initiated contact
with two of these companies to ascertain the specific locations of their
pipelines, their requirements to transport gas from us (including volume of gas
and quality of gas), and the costs to connect to their pipelines.



Presently,
we are determining the costs of transporting our gas products to these existing
interstate pipelines. The cost of installing a distribution infrastructure or
local gathering system will vary depending upon the distance the gas must travel
from wellhead to the compressor station and high pressure pipeline tap, and
whether the gas must be treated to meet the purchasing company's quality
standards. However, based on the close proximity of several major distribution
pipelines to our leased properties, plus our intent to drill as close to these
pipelines as practicable, we anticipate that the total cost of installing a
distribution infrastructure for a group of about 50-75 producing wells will be
approximately $6,500 each plus a one-time expense of $5,000 per well to tap into
the high pressure interstate pipeline and support a compressor and monitoring
system.





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The
prices obtained for oil and gas are dependent on numerous factors beyond our
control, including domestic and foreign production rates of oil and gas, market
demand and the effect of governmental regulations and incentives. We have
entered into forward sales contracts for a portion of the gas and oil we
presently produce. We do not have any delivery commitments for gas or oil from
wells not currently drilled. However, due to the U.S. government's recent push
toward increased domestic production of energy sources, and the high demand for
natural gas, we do not anticipate any difficulties in selling any oil and gas we
produce, once it has been delivered to a distribution facility.



The
timing of most of our capital expenditures is discretionary. Currently there are
no material long-term commitments associated with any capital expenditure plans,
that are currently in the investigative planning stage. Consequently, we have a
significant degree of flexibility to adjust the level of such expenditures as
circumstances warrant. The level of our capital expenditures will vary in future
periods depending on energy market conditions and other related economic
factors.



Significant
changes in the number of employees.



We
currently have four full time employees and two part time employees as well as
eight contract personnel that support and operate our field operations. As
drilling production activities increase, we intend to hire additional technical,
operational and administrative personnel as appropriate. None of our employees
are subject to any collective bargaining agreements; however, we have entered
into employment agreements with Paul Branagan, Gary Bridwell and Lawrence Finn.
We expect a significant change in the number of full time employees over the
next 12 months. However, at this time we are unable to quantify exactly how
many. We intend to use the services of independent consultants and contractors
to perform various professional services, particularly in the area of land
services, drilling, water hauling, pipeline construction, well design, well-site
monitoring and surveillance, permitting and environmental assessment. We believe
that this use of third-party service providers may enhance our ability to
contain general and administrative expenses.



Our
proposed personnel structure could be divided into three broad categories:
management and professional, administrative, and project field personnel. As in
most small companies, the divisions between these three categories are somewhat
indistinct, as employees are engaged in various functions as projects and work
loads demand.



Off-Balance
Sheet Arrangements



We
do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results or operations, liquidity,
capital expenditures or capital resources that is material to investors.



Derivatives



Description
of contracts.



To
reduce our exposure to unfavorable changes in natural gas prices we have entered
into an agreement to utilize energy swaps in order to have a fixed-price
contract. This contracts allows us to be able to predict with greater certainty
the effective natural gas prices to be received for hedged production and
benefit operating cash flows and earnings when market prices are less than the
fixed prices provided under the contracts. However, we will not benefit from
market prices that are higher than the fixed prices in our contracts for hedged
production. If we are unable to provide the quantity that we have contracted for
we will have to go to the open market to purchase the required amounts that we
have contracted to provide.





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Critical
Accounting Policies and Estimates



Our
discussion of financial condition and results of operations is based upon the
information reported in our financial statements. The preparation of these
statements requires us to make assumptions and estimates that affect the
reported amounts of assets, liabilities, revenues and expenses as well as the
disclosure of contingent assets and liabilities at the date of our financial
statements. We base our assumptions and estimates on historical experience and
other sources that we believe to be reasonable at the time. Actual results may
vary from our estimates due to changes in circumstances, weather, politics,
global economics, mechanical problems, general business conditions and other
factors. Our significant accounting policies are detailed in Note 1 to our
financial statements included in this Annual Report. We have outlined below
certain of these policies as being of particular importance to the portrayal of
our financial position and results of operations and which require the
application of significant judgment by our management.



Revenue
Recognition.    It is our policy to recognize revenue when
production is sold to a purchaser at a fixed or determinable price.



Full
Cost Method of Accounting.    We account for our oil and
natural gas operations using the full cost method of accounting. Under this
method, all costs associated with property acquisition, exploration and
development of oil and gas reserves are capitalized. Costs capitalized include
acquisition costs, geological and geophysical expenditures, lease rentals on
undeveloped properties and cost of drilling and equipping productive and
non-productive wells. Drilling costs include directly related overhead costs.
All of our properties are located within the continental United States.



Oil
and Natural Gas Reserve Quantities.    Reserve quantities and
the related estimates of future net cash flows affect our periodic calculations
of depletion and impairment of our oil and natural gas properties. Proved oil
and natural gas reserves are the estimated quantities of crude oil, natural gas
and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future periods from known reservoirs
under existing economic and operating conditions. Reserve quantities and future
cash flows included in the Form 10-KSB are prepared in accordance with
guidelines established by the SEC and FASB.



Effects
of Inflation and Pricing



The
oil and natural gas industry is very cyclical and the demand for goods and
services of oil field companies, suppliers and others associated with the
industry puts extreme pressure on the economic stability and pricing structure
within the industry. Material changes in prices impact revenue stream,
estimates of future reserves, borrowing base calculations of bank loans and
value of properties in purchase and sale transactions. Material changes in
prices can impact the value of oil and natural gas companies and their ability
to raise capital, borrow money and retain personnel. We anticipate the increased
business costs will continue while the commodity prices for oil and natural gas,
and the demand for services related to production and exploration, both remain
high (from a historical context) in the near term.





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Quantitative
and Qualitative Disclosure About Market Risk



Commodity
Price Risk



Since
new well development is an ongoing program, management expects revenue to grow
in the foreseeable future. In order to reduce natural gas price volatility, we
have entered into hedging transactions.



Normal
hedging arrangements have the effect of locking in for specified periods the
prices we would receive for the volumes and commodity to which the hedge
relates. Consequently, while hedges are designed to decrease exposure to price
decreases, they also have the effect of limiting the benefit of price increases.



Interest
Rate Risk



Our
current long term debt with Laurus Funds has a floating interest rate, with a
floor of 7.5%.  Therefore, interest rate changes will impact future results
of operations and cash flows.



FACTORS
THAT MAY AFFECT OUR RESULTS OF OPERATION



At
this stage of our business operations, even with our good faith efforts,
potential investors have a possibility of losing their investment.



Because
the nature of our business is expected to change as a result of shifts in the
market price of oil and natural gas, competition, and the development of new and
improved technology, management forecasts are not necessarily indicative of
future operations and should not be relied upon as an indication of future
performance.



While
Management believes its estimates of projected occurrences and events are within
the timetable of its business plan, our actual results may differ substantially
from those that are currently anticipated.



We
may need additional capital in the future to finance our planned growth, which
we may not be able to raise or it may only be available on terms unfavorable to
us or our stockholders, which may result in our inability to fund our working
capital requirements and harm our operational results.



We
have and expect to continue to have substantial capital expenditure and working
capital needs. We believe that current cash on hand and the other sources of
liquidity are only sufficient enough to fund our operations through fiscal 2005.
After that time we will need to rely on cash flow operations or raise additional
cash to fund our operations, to fund our anticipated reserve replacement needs
and implement our growth strategy, or to respond to competitive pressures and/or
perceived opportunities, such as investment, acquisition, exploration and
development activities.



If
low natural gas and oil prices, operating difficulties or other factors, many of
which are beyond our control, cause our revenues or cash flows from operations
to decrease, we may be limited in our ability to spend the capital necessary to
complete our development, production exploitation and exploration programs. If
our resources or cash flows do not satisfy our operational needs, we will
require additional financing, in addition to anticipated cash generated from our
operations, to fund our planned growth. Additional financing might not be
available on terms favorable to us, or at all. If adequate funds were not
available or were not available on acceptable terms, our ability to fund our
operations, take advantage of unanticipated opportunities, develop or enhance
our business or otherwise respond to competitive pressures would be
significantly limited. In such a capital restricted situation, we may curtail
our acquisition, drilling, development, and exploration activities or be forced
to sell some of our assets on an untimely or unfavorable basis.





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If
we raise additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders would be reduced, and
these newly issued securities might have rights, preferences or privileges
senior to those of existing stockholders.



Because
our common stock is deemed a low-priced "Penny" stock, an investment
in our common stock should be considered high risk and subject to marketability
restrictions.



Since
our common stock is a penny stock, as defined in Rule 3a51-1 under the
Securities Exchange Act, it will be more difficult for investors to liquidate
their investment even if and when a market develops for the common stock. Until
the trading price of the common stock rises above $5.00 per share, if ever,
trading in the common stock is subject to the penny stock rules of the
Securities Exchange Act specified in rules 15g-1 through 15g-10. Those rules
require broker-dealers, before effecting transactions in any penny stock, to:

- Deliver
    to the customer, and obtain a written receipt for, a disclosure document;
- Disclose
    certain price information about the stock;
- Disclose
    the amount of compensation received by the broker-dealer or any associated
    person of the broker-dealer;
- Send
    monthly statements to customers with market and price information about the
    penny stock; and
- In
    some circumstances, approve the purchaser's account under certain standards
    and deliver written statements to the customer with information specified in
    the rules.

Consequently,
the penny stock rules may restrict the ability or willingness of broker-dealers
to sell the common stock and may affect the ability of holders to sell their
common stock in the secondary market and the price at which such holders can
sell any such securities. These additional procedures could also limit our
ability to raise additional capital in the future.



We
may incur substantial write-downs of the carrying value of our gas and oil
properties, which would adversely impact our earnings.



We
intend to periodically review the carrying value of our gas and oil properties
under the full cost accounting rules of the Securities and Exchange Commission.
Under these rules, capitalized costs of proved gas and oil properties may not
exceed the present value of estimated future net revenues from proved reserves,
discounted at an annual rate of 10%. Application of this "ceiling"
test requires pricing future revenue at the un-escalated prices in effect as of
the end of each fiscal quarter and requires a write-down for accounting purposes
if the ceiling is exceeded, even if prices were depressed for only a short
period of time. We may be required to write down the carrying value of our gas
and oil properties when natural gas and oil prices are depressed or unusually
volatile, which would result in a charge against our earnings. Once incurred, a
write-down of the carrying value of our natural gas and oil properties is not
reversible at a later date.



Competition
in our industry is intense. We are very small and have an extremely limited
operating history as compared to the vast majority of our competitors, and we
may not be able to compete effectively.



We
intend to compete with major and independent natural gas and oil companies for
property acquisitions. We will also compete for the equipment and labor required
to operate and to develop natural gas and oil properties. The majority of our
anticipated competitors have substantially greater financial and other resources
than we do. In addition, larger competitors may be able to absorb the burden of
any changes in federal, state and local laws and regulations more easily than we
can, which would adversely affect our competitive position. These competitors
may be able to pay more for natural gas and oil properties and may be able to
define, evaluate, bid for and acquire a greater number of properties than we
can. Our ability to acquire additional properties and develop new and existing
properties in the future will depend on our ability to conduct operations, to
evaluate and select suitable properties and to consummate transactions in this
highly competitive environment. In addition, some of our competitors have been
operating in our core areas for a much longer time than we have and have
demonstrated the ability to operate through industry cycles.





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We
are highly dependent on Paul Branagan, our CEO, president and chairman. The loss
of Mr. Branagan, whose knowledge, leadership and technical expertise upon which
we rely, would harm our ability to execute our business plan.



Our
success depends heavily upon the continued contributions of Paul Branagan, whose
knowledge, leadership and technical expertise would be difficult to replace, and
on our ability to retain and attract experienced engineers, geoscientists and
other technical and professional staff. We have entered into an employment
agreement with Mr. Branagan; however, maintain no key person insurance on Mr.
Branagan. In addition, Mr. Branagan is an officer and director of other public
companies, which may impact the amount of his time spent on our business
matters. If we were to lose his services, our ability to execute our business
plan would be harmed and we may be forced to cease operations until such time as
we could hire a suitable replacement for Mr. Branagan.



Gas
and Oil prices are volatile. This volatility may occur in the future, causing
negative change in cash flows which may result in our inability to cover our
capital expenditures.



Our
future revenues, profitability, future growth and the carrying value of our
properties is anticipated to depend substantially on the prices we may realize
for our natural gas and oil production. Our realized prices may also affect the
amount of cash flow available for capital expenditures and our ability to borrow
and raise additional capital.



Natural
gas and oil prices are subject to wide fluctuations in response to relatively
minor changes in or perceptions regarding supply and demand. Historically, the
markets for natural gas and oil have been volatile, and they are likely to
continue to be volatile in the future. For example, natural gas and oil prices
declined significantly in late 1998 and 1999 and, for an extended period of
time, remained substantially below prices obtained in previous years. Among the
factors that can cause this volatility are:

- worldwide
    or regional demand for energy, which is affected by economic conditions;
- the
    domestic and foreign supply of natural gas and oil;
- weather
    conditions;
- domestic
    and foreign governmental regulations;
- political
    conditions in natural gas and oil producing regions;
- the
    ability of members of the Organization of Petroleum Exporting Countries to
    agree upon and maintain oil prices and production levels; and
- the
    price and availability of other fuels.

It
is impossible to predict natural gas and oil price movements with certainty.
Lower natural gas and oil prices may not only decrease our future revenues on a
per unit basis but also may reduce the amount of natural gas and oil that we can
produce economically. A substantial or extended decline in natural gas and oil
prices may materially and adversely affect our future business enough to force
us to cease our business operations. In addition, our financial condition,
results of operations, liquidity and ability to finance planned capital
expenditures will also suffer in such a price decline. Further, natural gas and
oil prices do not necessarily move together.





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Drilling
wells is speculative, often involving significant costs that may be more than
our estimates, and may not result in any addition to our production or reserves.
Any material inaccuracies in drilling costs, estimates or underlying assumptions
will materially affect our business.



Developing
and exploring for natural gas and oil involves a high degree of operational and
financial risk, which precludes definitive statements as to the time required
and costs involved in reaching certain objectives. The budgeted costs of
drilling, completing and operating wells are often exceeded and can increase
significantly when drilling costs rise due to a tightening in the supply of
various types of oilfield equipment and related services. Drilling may be
unsuccessful for many reasons, including title problems, weather, cost overruns,
equipment shortages and mechanical difficulties. Moreover, the successful
drilling of a natural gas or oil well does not ensure a profit on investment.
Exploratory wells bear a much greater risk of loss than development wells. A
variety of factors, both geological and market-related, can cause a well to
become uneconomical or only marginally economic. Our initial drilling and
development sites, and any potential additional sites that may be developed,
require significant additional exploration and development, regulatory approval
and commitments of resources prior to commercial development. Any success that
we may have with these wells or any future drilling operations will most likely
not be indicative of our current or future drilling success rate, particularly,
because we intend to emphasize on exploratory drilling. If our actual drilling
and development costs are significantly more than our estimated costs, we may
not be able to continue our business operations as proposed and would be forced
to modify our plan of operation.



Development
of our reserves, when established, may not occur as scheduled and the actual
results may not be as anticipated. Drilling activity may result in downward
adjustments in reserves or higher than anticipated costs. Our estimates will be
based on various assumptions, including assumptions required by the Securities
and Exchange Commission relating to natural gas and oil prices, drilling and
operating expenses, capital expenditures, taxes and availability of funds. The
process of estimating our natural gas and oil reserves is anticipated to be
extremely complex, and will require significant decisions and assumptions in the
evaluation of available geological, geophysical, engineering and economic data
for each reservoir. Due to our inexperience in the oil and gas industry and
development stage operations, our estimates may not be reliable enough to allow
us to be successful in our intended business operations. Our actual production,
revenues, taxes, development expenditures and operating expenses will likely
vary from those anticipated. These variances may be material.



The
natural gas and oil business involves numerous uncertainties and operating risks
that can prevent us from realizing profits and can cause substantial losses.



Our
development, exploitation and exploration activities may be unsuccessful for
many reasons, including weather, cost overruns, equipment shortages and
mechanical difficulties. Moreover, the successful drilling of a natural gas and
oil well does not ensure a profit on investment. A variety of factors, both
geological and market-related, can cause a well to become uneconomical or only
marginally economical. In addition to their cost, unsuccessful wells can hurt
our efforts to replace reserves.



The
natural gas and oil business involves a variety of operating risks, including:

- fires;
- explosions;
- blow-outs
    and surface cratering;
- uncontrollable
    flows of oil, natural gas, and formation water;
- natural
    disasters, such as hurricanes and other adverse weather conditions;
- pipe,
    cement, or pipeline failures;
- casing
    collapses;
- embedded
    oil field drilling and service tools;
- abnormally
    pressured formations; and
- environmental
    hazards, such as natural gas leaks, oil spills, pipeline ruptures and
    discharges of toxic gases.



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If
we experience any of these problems, it could affect well bores, gathering
systems and processing facilities, which could adversely affect our ability to
conduct operations. We could also incur substantial losses as a result of:

- injury
    or loss of life;
- severe
    damage to and destruction of property, natural resources and equipment;
- pollution
    and other environmental damage;
- clean-up
    responsibilities;
- regulatory
    investigation and penalties;
- suspension
    of our operations; and
- repairs
    to resume operations.

Because
we intend to use third-party drilling contractors to drill our wells, we may not
realize the full benefit of worker compensation laws in dealing with their
employees. Our insurance does not protect us against all operational risks. We
do not carry business interruption insurance at levels that would provide enough
funds for us to continue operating without access to other funds. For some
risks, we may not obtain insurance if we believe the cost of available insurance
is excessive relative to the risks presented. In addition, pollution and
environmental risks generally are not fully insurable. If a significant accident
or other event occurs and is not fully covered by insurance, it could impact our
operations enough to force us to cease our operations.



The
unavailability or high cost of drilling rigs, equipment, supplies, personnel and
other services could adversely affect our ability to execute on a timely basis
our development, exploitation and exploration plans within our budget.



Shortages
or an increase in cost of drilling rigs, equipment, supplies or personnel could
delay or interrupt our operations, which could impact our financial condition
and results of operations. Drilling activity in the geographic areas in which we
conduct drilling activities may increase, which would lead to increases in
associated costs, including those related to drilling rigs, equipment, supplies
and personnel and the services and products of other vendors to the industry.
Increased drilling activity in these areas may also decrease the availability of
rigs. We do not have any contracts with providers of drilling rigs and we cannot
assure you that drilling rigs will be readily available when we need them.
Drilling and other costs may increase further and necessary equipment and
services may not be available to us at economical prices.



We
are subject to complex laws and regulations, including environmental
regulations, which can adversely affect the cost, manner or feasibility of doing
business.



Development,
production and sale of natural gas and oil in the United States are subject to
extensive laws and regulations, including environmental laws and regulations. We
may be required to make large expenditures to comply with environmental and
other governmental regulations. Matters subject to regulation include:





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- location
    and density of wells;
- the
    handling of drilling fluids and obtaining discharge permits for drilling
    operations;
- accounting
    for and payment of royalties on production from state, federal and Indian
    lands;
- bonds
    for ownership, development and production of natural gas and oil properties;
- transportation
    of natural gas and oil by pipelines;
- operation
    of wells and reports concerning operations; and
- taxation.

Under
these laws and regulations, we could be liable for personal injuries, property
damage, oil spills, discharge of hazardous materials, remediation and clean-up
costs and other environmental damages. Failure to comply with these laws and
regulations also may result in the suspension or termination of our operations
and subject us to administrative, civil and criminal penalties. Moreover, these
laws and regulations could change in ways that substantially increase our costs.
Accordingly, any of these liabilities, penalties, suspensions, terminations or
regulatory changes could materially adversely affect our financial condition and
results of operations enough to possibly force us to cease our business
operations.



Our
oil and gas operations may expose us to environmental liabilities.



Any
leakage of crude oil and/or gas from the subsurface portions of our wells, our
gathering system or our storage facilities could cause degradation of fresh
groundwater resources, as well as surface damage, potentially resulting in
suspension of operation of the wells, fines and penalties from governmental
agencies, expenditures for remediation of the affected resource, and liabilities
to third parties for property damages and personal injuries. In addition, any
sale of residual crude oil collected as part of the drilling and recovery
process could impose liability on us if the entity to which the oil was
transferred fails to manage the material in accordance with applicable
environmental health and safety laws.



Our
lease ownership may be diluted due to financing strategies we may employ in the
future due to our lack of capital.



To
accelerate our development efforts we plan to take on working interest partners
that will contribute to the costs of drilling and completion and then share in
revenues derived from production. In addition, we may in the future, due to a
lack of capital or other strategic reasons, establish joint venture partnerships
or farm out all or part of our development efforts. These economic strategies
may have a dilutive effect on our lease ownership and will more than likely
reduce our operating revenues.



We
recently completed an acquisition of certain assets and we may acquire more
assets or other businesses in the future.



We
recently acquired certain assets owned by Savage Resources, LLC and Savage
Pipeline, LLC for the purchase price of approximately $10 million, all of which
was paid in cash. This is the first big acquisition for our Company and
Management team. Our ability to successfully integrate the Savage acquisition
into our existing operations is anticipated to depend on a number of factors.



We
may consider acquisitions of other assets or other business. Any acquisition
involves a number of risks that could fail to meet our expectations and
adversely affect our profitability. For example:

- The
    acquired assets or business may not achieve expected results;
- We
    may incur substantial, unanticipated costs, delays or other operational or
    financial problems when integrating the acquired assets;
- We
    may not be able to retain key personnel of an acquired business;
- Our
    management's attention may be diverted; or
- Our
    management may not be able to manage the acquired assets or combined entity
    effectively or to make acquisitions and grow our business internally at the
    same time.

If
these problems arise we may not realize the expected benefits of an acquisition.





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Risks
Associated with Laurus Funds Financing



We
have substantial indebtedness to Laurus Master Fund, Ltd. which is secured by
certain assets acquired from Savage Resources, LLC and Savage Pipeline, LLC. If
an event of default occurs under the secured note issued to Laurus Funds, Laurus
Funds may foreclose on these assets and we may be forced to curtail our
operations or sell some of these assets to repay the note.



On
October 28, 2004, we entered into an $8 million credit facility with Laurus
Master Fund, Ltd. pursuant to a secured convertible term note and related
agreements. Subject to certain grace periods, the notes and agreements provide
for the following events of default (among others):

- Failure
    to pay interest and principal when due;
- An
    uncured breach by us of any material covenant, term or condition in any of
    the notes or related agreements;
- A
    breach by us of any material representation or warranty made in any of the
    notes or in any related agreement;
- Any
    money judgment or similar final process is filed against us for more than
    $50,000;
- Any
    form of bankruptcy or insolvency proceeding is instituted by or against us;
    and
- Suspension
    of our common stock from our principal trading market for five consecutive
    days or five days during any ten consecutive days.

In
the event of a future default under our agreements with Laurus Funds, Laurus
Funds may enforce its rights as a secured party and we may lose all or a portion
of the acquired assets or be forced to materially reduce our business
activities.



There
can be no assurance that we will satisfy all of the conditions of the agreements
executed in the private placement with Laurus Funds.



Pursuant
to the terms of certain agreements, we are subject to a condition subsequent to
obtain an effective registration statement permitting the resale of common stock
issued upon the exercise of the conversion rights of the purchaser and the
exercise of the warrants by the purchaser on or before one hundred days.
Although we believe that we will meet the deadline for obtaining an effective
registration statement, there can be no assurance that such a statement will be
declared effective within the time required. Failure to satisfy this condition
subsequent would constitute a default. In connection with the transaction, we
have granted to Laurus Funds a security interest in the assets purchased.





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The
issuance of shares to Laurus Funds upon conversion of the convertible term note
and exercise of its warrants may cause immediate and substantial dilution to our
existing stockholders.



The
issuance of shares upon conversion of the convertible term note and exercise of
warrants may result in substantial dilution to the interests of other
stockholders. Laurus Funds may ultimately convert and sell the full amount
issuable on conversion. Although Laurus Funds in some cases may not, subject to
certain exceptions, convert their term note and/or exercise their warrants if
such conversion or exercise would cause them to own more than 4.99% of our
outstanding common stock, this restriction does not prevent Laurus Funds from
converting and/or exercising some of their holdings and then converting the rest
of their holdings. In this way, Laurus Funds could sell more than this limit
while never holding more than this limit, which will have the effect of further
diluting the proportionate equity interest and voting power of holders of our
common stock.



It
is likely at the time shares of common stock are issued to Laurus Funds, the
conversion price of such securities will be less than the market price of the
securities. The issuance of common stock under the terms of our agreements with
Laurus Funds will result in dilution of the interests of the existing holders of
common stock at the time of the conversion. Furthermore, the sale of common
stock owned by Laurus Funds as a result of the conversion of the convertible
term note may result in lower prices for the common stock if there is
insufficient buying interest in the markets at the time of conversion.



Laurus
Funds has no obligation to convert shares if the market price is less than the
conversion price.



Laurus
Funds has no obligation to cause us to issue common stock if the market price is
less than the applicable conversion price. On October 28, 2004, the closing
price of our stock was $1.69. The convertible note has a conversion price of
$1.50. Thus the conversion rights granted to Laurus Funds was at a discount to
the recent closing price of the common stock. Laurus Funds has no obligation to
convert the securities or to accept common stock as payment for interest if the
market price of the securities for five trading days prior to a conversion date
is less than 115% the conversion price. The amount of common stock that may be
issued to Laurus Funds is subject to certain limitations based on price, volume
and/or the inventory of our common stock held by Laurus Funds.



Item
3. Controls and Procedures.



We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in reports filed under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
specified time periods. As of the end of the period covered by this report, our
Chief Executive Officer and Chief Financial Officer evaluated the effectiveness
of our disclosure controls and procedures. Based on the evaluation, which
disclosed no significant deficiencies or material weaknesses, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective. There were no changes in our internal
control over financial reporting that occurred during our most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.



PART
II--OTHER INFORMATION



Item 1.
Legal Proceedings.



Petrol
is and may become involved in various routine legal proceedings incidental to
its business. However, to Petrol's knowledge as of the date of this report,
there are no material pending legal proceedings to which Petrol is a party or to
which any of its property is subject.





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Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.



On
January 11, 2005, we issued 10,000 shares of our restricted common stock in lieu
of cash compensation to Anthony LoCascio for land and other services rendered to
the Company. We believe that the issuance of the shares was exempt from the
registration and prospectus delivery requirements of the Securities Act of 1933
by virtue of Section 4(2).



On
January 11, 2005, we issued 60,000 shares of our restricted common stock in lieu
of cash compensation to Russell A. Frierson for land and administrative support
rendered to the Company. We believe that the issuance of the shares was exempt
from the registration and prospectus delivery requirements of the Securities Act
of 1933 by virtue of Section 4(2).



On
January 11, 2005, we issued 50,000 shares of our restricted common stock in lieu
of a cash bonus to David Polay for past CFO services rendered to the Company. We
believe that the issuance of the shares was exempt from the registration and
prospectus delivery requirements of the Securities Act of 1933 by virtue of
Section 4(2).



On
January 11, 2005, we issued 100,000 shares of our restricted common stock to
Gary Bridwell for completing one year of employment with the Company pursuant to
his employment agreement dated November 1, 2003. We believe that the issuance of
the shares was exempt from the registration and prospectus delivery requirements
of the Securities Act of 1933 by virtue of Section 4(2).



On
February 1, 2005, we entered into an agreement with Robert Howell wherein we
agreed to grant Mr. Howell 125,000 options to purchase our common stock at $2.33
per share. The options expire in 5 years. We believe that the issuance of the
shares was exempt from the registration and prospectus delivery requirements of
the Securities Act of 1933 by virtue of Section 4(2).



On
February 7, 2005, we entered into a Consulting Agreement with CEOcast, Inc.,
wherein we agreed to issue 40,000 shares of our common stock to CEOcast. We
believe that the issuance of the shares was exempt from the registration and
prospectus delivery requirements of the Securities Act of 1933 by virtue of
Section 4(2). As of the date of this filing the shares have not been issued.



On
March 16, 2005, we entered into an agreement with CSC Group, wherein we agreed
to grant 150,000 options to CSC at $2.04 per share of our common stock. The
options expire in 5 years. We believe that the issuance of the shares was exempt
from the registration and prospectus delivery requirements of the Securities Act
of 1933 by virtue of Section 4(2).



On
March 23, 2005, Laurus Master Fund, Ltd. converted $190,677.37 of accrued
interest due under the Convertible Term Note. Pursuant to the conversion rate of
$1.50 we issued 127,118 shares of our restricted common stock to Laurus on March
31, 2005. We believe that the issuance of the shares was exempt from the
registration and prospectus delivery requirements of the Securities Act of 1933
by virtue of Section 4(2).



Subsequent
Events



On
April 13, 2005, Laurus Master Fund, Ltd. converted $52,819.75 of accrued
interest due under the Convertible Term Note. Pursuant to the conversion rate of
$1.50 we issued 35,213 shares of our restricted common stock to Laurus on April
19, 2005. We believe that the issuance of the shares was exempt from the
registration and prospectus delivery requirements of the Securities Act of 1933
by virtue of Section 4(2).





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On
April 29, 2005, Laurus Master Fund, Ltd. converted $112,500 of principal into
75,000 shares under the Convertible Term Note. We issued the 75,000 shares of
our restricted common stock to Laurus on May 5, 2005. We believe that the
issuance of the shares was exempt from the registration and prospectus delivery
requirements of the Securities Act of 1933 by virtue of Section 4(2).



On
May 12, 2005, Laurus Master Fund, Ltd. converted $115,882.28 of principal and
$54,346.47 of accrued interest due under the Convertible Term Note. Pursuant to
the conversion rate of $1.50 we issued 113,486 shares of our restricted common
stock to Laurus on May 17, 2005. We believe that the issuance of the shares was
exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933 by virtue of Section 4(2).



Item
3. Defaults Upon Senior Securities.



None.



Item 4.
Submission of Matters to a Vote of Security Holders.



None.



Item 5.
Other Information.



Resignation
and Appointment of Officer



Effective
May 9, 2005, John Garrison resigned as Chief Financial Officer of the Company.
Concurrently, the board of directors appointed Lawrence Finn as Vice President
and Chief Financial Officer of the Company. We agreed to compensate Mr. Finn an
annual base salary of $130,000 which will be subject to an annual review.



Lawrence
Finn, is Vice President and Chief Financial Officer of the Company. Mr.
Finn graduated from the University of Houston of Houston, Texas with a Bachelor
of Business Administration in 1970. From 2001 through May 2005, Mr. Finn worked
for CDX Gas, LLC, a private natural gas company with operations in the U.S. and
Canada, concentrating in coal bed methane extraction. Mr. Finn was responsible
for identifying and attracting partners in development projects in Michigan,
Indiana and Northern Kentucky. From 1993 to 2000, Mr. Finn served as Vice
President Finance and Chief Financial Officer of The Wiser Oil Company. Mr. Finn
was directly responsible for commercial and investment banking, corporate
planning, investor relations, corporate communications and tax reporting.



Item 6.
Exhibits.



|31.1* | Certification
      of Paul Branagan, CEO pursuant to Section 302 of the Sarbanes-Oxley Act
|----- | -------------------------------------------------------------------------------------------
|31.2* | Certification
      of Lawrence Finn, CFO pursuant to Section 302 of the Sarbanes-Oxley Act
|32.1* | Certification
      of Paul Branagan, CEO pursuant to Section 906 of the Sarbanes-Oxley Act
|32.2* | Certification
      of Lawrence Finn, CFO pursuant to Section 906 of the Sarbanes-Oxley Act

*
Filed herewith



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SIGNATURES



Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.



PETROL
OIL AND GAS, INC.

(Registrant)



By: /s/Lawrence
Finn

Lawrence Finn, Chief Financial Officer

(On behalf of the registrant and as

principal accounting officer)



Date:
May 19, 2005